Hitting the Savers: Euro Zone Reaches Deal on Cyprus Bailout

March 18th, 2013

Published on Spiegel Online International, March 16, 2013.

After fraught negotiations, euro-zone finance ministers reached a deal early Saturday to provide up to €10 billion ($13 billion) bailout funds to Cyprus, which faces bankruptcy in May. For the first time, deposits at banks in a country are being seized to assist in the rescue.  

Euro-zone finance ministers and the International Monetary Fund reached a deal with Cyprus early Saturday morning on a bailout package for the country that has been the subject of dispute for months now. It will mark the first time that savers in a country in the euro zone are required to participate in a bailout … //

… The Cypriot government said Saturday it would cease electronic transfers to prevent savers from wiring money out of the country. And Jörg Asmussen, a German board member of the European Central Bank said that the amount of the one-time levy would immediately be frozen in all accounts in Cyprus. Banks in the country will also be closed on Monday because of a holiday. The Cypriot government is expected to pass a law this weekend approving the levy. “I assume that the levy can be applied before the banks reopen normally on Tuesday,” Asmussen said.

A Fair Way of Sharing the Burden:

Cypriot Finance Minister Michalis Sarris said he hoped for a fresh start for Cyprus following the bailout. “It’s not a pleasant outcome, especially for the people involved,” he said. “This is a once and for all levy.” He added that the tax would be a “very fair way of sharing the burden.” He also said it had been necessary to “protect the general welfare of the people and the stability of the system”.

Cyprus has suffered massively as a result of its domestic banking crisis. The financial sector plays an extremely important role in the Cypriot economy. The debt haircut of private creditors in Greece last year also created significant problems for numerous Cypriot financial institutions. Cyprus officially requested a €17-billion aid package from Brussels in June.

In recent weeks, EU member states bitterly debated whether or not to give a bailout package to Cyprus. Germany had called for restraint in providing aid and also sought to impose conditions, including that of requiring savers to participate. The IMF, the Netherlands and Finland also supported Germany’s position.

Russia Likely to Assist:

For the first time in the three-year euro crisis, Russia is also likely to participate in the bailout. European Economic and Currency Affairs Commissioner Olli Rehn said Russian Finance Ministry officials indicated they would consider easing the terms of a €2.5 billion loan paid to Cyprus two years ago. The repayment schedule could be lengthened and the interest rate lowered. Cypriot Finance Minister Sarris is expected to travel to Moscow to negotiate on Monday, a Cypriot diplomat told reporters.
Germany and other countries have been irritated by a combination of a low corporate tax rate and lax financial oversight that they claim has made Cyprus a haven for Russian money laundering to the tune of billions. Under the agreement, an independent private company will be installed in the country to observe Cyprus’ adherence to the EU’s anti-money laundering regulations.

The bailout package must still be approved by Germany’s federal parliament, the Bundestag. Following Greece, Portugal and Ireland, Cyprus will become the fourth country to obtain a full bailout under the euro rescue effort. Spain is also receiving money, but only to recapitalize its ailing banks.
(full text).

Links:

in german on Spiegel.de: EU-Hilfspaket: Zypern verschiebt Enteignungsbeschluss, 17. März 2013: Die Zypern-Rettung wird zur Zitterpartie. Das Parlament in Nikosia hat seine Abstimmung auf Montag verschoben. Die Teilenteignung der Kleinsparer sorgt für Ärger und könnte die erforderliche Zustimmung der Abgeordneten gefährden. Bringt ein Freibetrag die Lösung?

a funny pub on vimeo: le papier ne sera jamais mort / Paper is not dead, 0.39 min.

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